World to RBA: Wake up!

Our economy needs a plan, not wishful thinking and rhetoric. Wage growth is at a record low in 17 out of 18 industries. The global economy is being transformed meaning jobs growth only gets tougher from here particularly for those economies without leadership.

Australian wage growth data out yesterday showed the lowest growth on record, again. Last year's result was a new record low but this year's smashed it. Worse still, out of the 18 industries measured, 17 are experiencing record lows. Health is only having its second worst period on record. Record lows were felt across Some industries, like professional services and construction and running at less than half their average rates. And few are above the rate of inflation.

Yet just last month our central bank, the protectors of our economic health, came out with this beauty:

(RBA) Members noted that the strength of recent labour market data had removed some of the downside risk in the Bank’s forecast of wage growth - RBA Board minutes, July 2017

That recent strength was based on one quarter's result that showed that two years of declining demand for labour had had a reprieve. One point of data in a sea of weak wage growth, weak inflation, weak total hours worked, weak underemployment. There is some rationale to talking up an economy to boost confidence and hope that boosts the economy. But when that false optimism results in the Australian dollar rising and making the situation so much worse, there is no excuse.

The RBA needs to wake up to some simple facts:

1. Yes the global economy is stronger but it is not strong
2. Our domestic economy is the weakest it has been since the early 1990s recession, and when the construction cycle slows next year, it will get much worse.  Talking about our low "unemployment" rate is misleading when it hides all of those people that need more work but are having their hours cut back each year, not increased.
3. China's growing corporate debt pile will either be addressed by lowering their GDP targets (bad for Australia) or a massive restructure of state owned enterprises either controlled or via crisis (bad/really bad for Australia). Either way the answer has to be that they stop investing in fixed assets like infrastructure, steel production and housing that isn't needed, and that means less demand for our commodities.
4. The digital economic revolution, like the industrial revolution 150 years before it, is fundamentally changing the structure of the demand for labour, globally.

The situation with the domestic economy is cyclical meaning it will right itself in the next few years. The situation in China is still manageable albeit the options for a managed outcome are disappearing with every month that they let debt rise further. 

But the digital economic revolution is happening no matter what. Labour markets are going to be fundamentally and dramatically changed over the next 20-30 years and that change is accelerating now. The change in 2018 will be double that in 2017, double again in 2019 and so on. We can only just notice the change this year and probably only noticeable if you looked very hard last year. But that is the nature of a technology revolution – predicting the pace of change is extremely challenging, particularly to economists who are trained to look backwards to explain the future. 

In every major economy, unemployment is falling but wage growth is low. Even in the US, arguably the strongest of the major economies in recent years, has low and falling underemployment but still has below average wage growth. We have high underemployment, so there is little to no chance that we will see wage growth unless something radically changes. If Australia invests in the digital revolution now, new economy jobs will accrue here and wage growth will exceed global averages. If we don't, which to be clear is our current trajectory despite the rhetoric, the losses to traditional jobs will not be replaced with new ones, and our standard of living will decline. It’s actually that simple.

Is it the RBA’s job to address the lack of investment in the digital economy? Of course not. But it is also not their job to announce “she’ll be right mate” and delay the conversation we need to have about what Australia’s future is. They need to announce a longer-term plan to keep the economy in good health while government and corporate sectors work together to evolve Australia’s future. We get that they don’t want to be blamed for the housing bubble, so they don’t have to drop rates. But telling the market that rates will be staying at their current levels until the labour market returns to good health push the dollar down, boosting education and tourism, and buying us some time. Good health means normal levels of UNDERemployment (not the fake news Unemployment) and global norms for wage growth.

Time to wake up RBA, we need to know you have a plan that goes beyond crossing your fingers.